Diversification Bias and the Law of One Price: An Experiment on Index Mutual Funds |
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Authors: | Nathan Mauck Leigh Salzsieder |
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Institution: | University of Missouri – Kansas City |
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Abstract: | Individual investors select high-fee index mutual funds despite the fact that the future payouts are nearly identical. The authors offer an explanation for this violation of the law of one price based on investor desire to diversify. While diversification in some settings may be beneficial, in the case of assets with identical payouts, fee minimization is the only rational strategy. The evidence confirms that investors diversify by selecting multiple higher fee funds rather than minimizing fees when investing in index mutual funds. |
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Keywords: | Mutual funds S& P index funds Behavioral finance Diversification bias |
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